Returned overpaid wages in subsequent year

[momona]

In 2020, taxpayer was informed that he was overpaid by the University in 2019. He is FICA exempt and only had federal and state income taxes withheld. He paid the amount requested by the University in 2020 and has not worked for them since 2019.

The University will not issue an amended W-2 saying that the tax preparer will know what to do. Um I don't. I know the University isn't going to issue a negative W-2, either.

Does some of the answer lie in when the University amended the 941? (I am assuming state universities have to file 941's like everyone else) At first I thought they could just reduce the 2020 wages and federal taxes but then it won't tie into the W-2's.

Any guidance would be appreciated.

[New York Enrolled Agent]

In 2020, taxpayer was informed that he was overpaid by the University in 2019. He is FICA exempt and only had federal and state income taxes withheld. He paid the amount requested by the University in 2020 and has not worked for them since 2019.

The University will not issue an amended W-2 saying that the tax preparer will know what to do. Um I don't. I know the University isn't going to issue a negative W-2, either.

Does some of the answer lie in when the University amended the 941? (I am assuming state universities have to file 941's like everyone else) At first I thought they could just reduce the 2020 wages and federal taxes but then it won't tie into the W-2's.

Any guidance would be appreciated.

What you have is a repayment. There is no amending.

I would tell you to look at IRS Pub 525 - there is a section on how to handle repayments. I usually stay away from telling folks to use pubs but this one is pretty well written.

[TAXNJ]

See if this helps

https://www.irs.gov/faqs/irs-procedures/w-2-additional-incorrect-lost-non-receipt-omitted/w-2-additional-incorrect-lost-non-receipt-omitted

[Rapid Robert]

OP has received two conflicting answers so far - one pointing to treatment as a repayment of an amount previously included in income, the other pointing to how to "amend" a W-2 when the employer won't do so (even though the W-2 was correct for the year it was issued). The first treats it as an offsetting transaction in two different tax years, while the other involves amending the initial tax year to make it as if the overpayment & subsequent repayment never happened.

I will take a position that the first treatment is the correct one for a cash basis taxpayer, although it can have a bad result for the taxpayer if the amount is $3,000 or less.

As NYEA said, this is based on the info in Pub 525, but I have found that it is a very safe bet that info in the IRS pubs is based on the law and regs (although not necessarily court cases).

[New York Enrolled Agent]

OP has received two conflicting answers so far

I will take a position that the first treatment is the correct one for a cash basis taxpayer, although it can have a bad result for the taxpayer if the amount is $3,000 or less.

You are correct RR - the original poster has received two conflicting answers - but only one of them is correct.

There is no amending - there is no corrected W-2. The issue of repayments was determined by the Supreme Court.
A snip from TCM 2014-111

If a taxpayer includes earnings in gross income under a claim of right in one taxable year that the taxpayer is required to repay in a subsequent taxable year, the taxpayer is not allowed to amend the tax return for the taxable year of inclusion to exclude the repaid earnings from gross income. United States v. Lewis, 340 U.S. 590 (1951). In 1954 Congress enacted a statutory remedy, section 1341, to alleviate some of the hardship of this rule.

[TAXNJ]

One needs to reread carefully the reply post since it is not an “answer”. Think the Original Poster decides what the “answer” would be. That is why this website Is great.

The reply post was based on the Original Post ....”The University will not issue an amended W-2 saying that the tax preparer will know what to do. “


So the reply post suggestion was “See if this helps” which is not all inclusive but the Original Poster would decide if applicable or not based on that or other reply posts.

However, one has the right to say “one reply post is correct” In their mind which may give them a smile, but needs to reread carefully the other reply posts before making the comment.

Yet it still leaves open how to find a benefit for the client.

[TAXNJ]

Possible benefit to the client.

If your client cannot “deduct” the repayment (because not able to itemize their deductions) then something to consider to see if applicable to client. If taxpayer cannot itemized then the “tax repaid” may be a Charitable Deduction to the US Treasury:

“Up to $300 per taxpayer ($600 for a married couple) in annual charitable contributions. This is available only to people who take the standard deduction (for taxpayers who do not itemize their deductions). It is an “above the line” adjustment to income that will reduce a donor’s adjusted gross income (AGI), and thereby reduce taxable income. “


As far as repayments (mentioned in another reply post reference IRS pub 525) see if additional information is applicable:

see TTB 3-23

“Repayments
A taxpayer may be able to deduct or take credit for an amount of a repayment that has been included in income.
Income received and amount repaid in same year. The taxpayer reduces the income by the amount repaid and reports the net amount as taxable income.

Claim of right. Income received in an earlier year and repaid in current year. A claim of right exists if at the time the income was reported, it appeared the taxpayer had unrestricted rights to the income. (IRC §1341)

Repayment of $3,000 or less. Deduct the repayment on the form or schedule on which the income was previously reported (Schedule C, F, etc.). If reported as a capital gain, deduct the repayment as a capital loss on Schedule D (Form 1040). If the income was reported as wages, unemployment, or other nonbusiness income, no deduction is allowed.

.......Repayment more than $3,000. .......


As far as relying on IRS publications and/or see attached article (which you maybe aware)

“IRS Says You Can't Rely On IRS Instructions”

https://www.forbes.com/sites/robertw.../#340f3acb341a


Prior Calendar Year(s)
How handled by one university:

https://www.wm.edu/offices/financial...very/index.php